Oil Market Overreacted to Inventory Numbers: Analyst

A U.S. government report showing crude inventories rose more than expected last week, pushed oil prices down by more than 2 percent on Wednesday. But, according to one analyst, investors overreacted and the inventory increase was partly due to the construction of a new refinery.


"The majority of the inventory build-up took place in the U.S. Gulf Coast which could be a prelude to expanding refinery capacity," Victor Shum, managing director at Purvin and Gertz, an international energy consulting firm, told CNBC. "The Motiva refinery in Port Arthur, Texas is soon to start up a 325,000 barrels per day capacity expansion."

Motiva, a partnership between Royal Dutch Shell and Saudi Aramco, is expanding to process as much as 650,000 barrels per day of oil sometime this month. The refinery is expected to reach full rates by September and will be the largest in the U.S., according to Reuters.

On Wednesday the U.S. Energy Information Administration said domestic crude inventories rose 9.01 million barrels in the week to March 30 as imports increased by 505,000 barrels a day to 9.74 million. This was much higher than a Reuters survey of analysts that forecast a gain of 2.2 million barrels.

It was also the largest one-week gain since 2008, and it follows a 7.1 million barrel crude build in the previous week.

Shum says he is bearish on the prospects of oil in the near-term as spring is seen as a low-demand period and as refineries shut down for maintenance.

But oil prices are expected to find support because worries about supply still remain. "I think there is still that concern on the strength of the dollar and we still haven't solved the issues in Iran, it's still a wild card and I think the dips will be supported," Jonathan Barratt, CEO of BarrattsBulletin.com told CNBC.

Analysts expect prices to pick up closer to the summer as the European embargo on Iranian oil begins on July 1 and with the beginning of the U.S. driving season.